Opinion
Case No. 00-4123-DES
May 22, 2001
MEMORANDUM AND ORDER
This matter is before the court on plaintiff's Motion for Default Judgment (Doc. 5). This is an action on a promissory note pursuant to the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. § 1330, 1602 et seq. Defendants have made no appearance in this matter. After consideration of plaintiff's filings, the court is prepared to rule on the motion.
I. FACTUAL BACKGROUND
On December 7, 1981, the Banco de Desarollo Agropecuaria S.A. (Bandango) issued a bearer form promissory note in the amount of fifteen million United States dollars ($15,000,000). The note was guaranteed by the Hacienda Ministry of the Republic of Venezuela ("Venezuela"). The note was originally due on December 8, 1991, but the maturity date was extended until December 8, 1999. Plaintiff, a Wyoming corporation with its principal place of business in Texas, acquired the note in January of 1998 under agreement with the then registered owner of the note, Techniologia Y Proyectos Marblan, a company located in Caracas, Venezuela. The owner of the Venezuelan company, Captain Tomas Marino Blanco, signed the transfer of ownership document regarding the note, which was duly filed with the Hacienda Ministry on February 9, 1998.
Plaintiff has filed suit against two defendants, the Republic of Venezuela and the Hacienda Ministry (translated as Treasury Department). Venezuela is a federal republic composed of twenty-two states, a federal district, and seventy-two federal dependencies. Its current constitution, comprised of 350 articles, was promulgated on December 30, 1999. The constitution renamed the country "Bolivarian Republic of Venezuela" and is sometimes referred to as "The Federal Bolivarian Republic of Venezuela," or simply "The Republic of Venezuela." Under the new constitution, the executive power is vested in the President, who has been given extensive powers, and is assisted by a Council of Ministers, whom the President has the power to appoint or remove. Under the constitution, the President is "to administer the national public treasury."
With the adoption of the new constitution, it appears the Hacienda Ministry was absorbed into the general powers of the executive branch of the Republic of Venezuela. Prior to the year 2000, all official documents with respect to the note in question were signed, filed, or verified by the Hacienda Ministry and its Minister. The verification documents presented to the court appear to show that regardless of the status of the Hacienda Ministry, the note was guaranteed by the Republic of Venezuela. Therefore, in light of the court's final ruling in this matter, the court will assume, without deciding, that the Republic of Venezuela is, as plaintiff alleges, contractually obligated to pay the promissory note.
Plaintiff alleges to have made proper demands upon defendants for payment of the note, but no payment has apparently been forthcoming. The note now resides in escrow at the Commerce Bank Trust of Topeka, Kansas. Plaintiff now brings this action to enforce its rights under the note.
II. STANDARD OF REVIEW
The Foreign Sovereign Immunities Act of 1976 ("FSIA"), 28 U.S.C. § 1330, 1602 et seq., provides that a "foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter." 28 U.S.C. § 1604. In suits against foreign sovereigns, it is well established that the FSIA provides the only basis for the subject-matter jurisdiction of United States courts. See generally Saudi Arabia v. Nelson, 507 U.S. 349 (1993).
Unlike the general default principles established by the Federal Rules of Civil Procedure, see Fed.R.Civ.P. 55, under the FSIA, the court must undertake a more critical examination of the movant's allegations contained within its filings. See 28 U.S.C. § 1608 (e) ("No judgment by default shall be entered by a court of the United States or of a State against a foreign state, a political subdivision thereof, or an agency or instrumentality of a foreign state, unless the claimant establishes his claim or right to relief by evidence satisfactory to the court."). See also Fed.R.Civ.P. 55(e) (adopting similar language for acquiring default judgment against the United States).
Additionally, recognizing that this matter turns on the issue of jurisdiction, the court may properly "look beyond the complaint's jurisdictional allegations and view whatever evidence has been submitted to determine whether in fact subject matter jurisdiction exists." Bowyer v. United States Dep't of Air Force, 875 F.2d 632, 635 (7th Cir. 1989). One circuit court has noted: "A district court `has considerable latitude in devising the procedures it will follow to ferret out the facts pertinent to jurisdiction.'" Adler v. Federal Republic of Nigeria, 107 F.3d 720, 728 (9th Cir. 1997) (quoting Foremost-McKesson, Inc. v. Islamic Republic of Iran, 905 F.2d 438, 449 (D.C. Cir. 1990)).
III. DISCUSSION
A. Subject-Matter Jurisdiction
As stated above, the court's subject-matter jurisdiction over this matter solely flows from the FSIA. Under the FSIA, a foreign state, including its agencies and instrumentalities, is presumptively immune from suit in United States courts unless a specific FSIA exception to immunity applies. See Nelson, 507 U.S. at 355. The exception at issue in this case is supplied by § 1605(a)(2), which provides:
A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case —
. . . .
(2) in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States. . . .28 U.S.C. § 1605(a)(2) (emphasis added). In particular, plaintiff asserts this action falls within the third clause of the routinely entitled "commercial activity" exception. Therefore, to have subject-matter jurisdiction over this action, the court must find that Venezuela: (1) committed an act outside the United States; (2) that said act was performed in connection with a commercial activity of Venezuela; and (3) that said act caused a "direct effect" in the United States.
1. Commercial Activity
As a threshold question, the court must first determine if this matter involves a "commercial activity" of Venezuela. The Supreme Court has specified that "a state engages in commercial activity [within the meaning of § 1605(a)(2)] . . . where it exercises only those powers that can also be exercised by private citizens, as distinct from those powers peculiar to sovereigns." Nelson, 507 U.S. at 360 (internal citations and quotation marks omitted). Venezuela in this case undertook the burden of guaranteeing a promissory note. The court has no hesitation in finding such activity to be of a commercial nature for purposes of the FSIA. See Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 614-16 (1992) (finding sovereign's issuance of bonds to be a commercial activity). In Weltover, the Republic of Argentina and its central bank issued bonds to cover existing debt. In holding that such activity was commercial in nature, the Court stated:
The commercial character of the [bonds] is confirmed by the fact that they are in almost all respects garden-variety debt instruments: They may be held by private parties; they are negotiable and may be traded on the international market . . .; and they promise a future stream of cash income.
. . . .
[I]t seems to us that even in full context, there is nothing about the issuance of these [bonds] . . . that is not analogous to a private commercial transaction.Weltover, 504 U.S. at 615-16. The court finds sufficient similarities in the present case to determine Venezuela's action was also analogous to a private commercial transaction.
2. Act in Connection with Commercial Activity
It is clear that Venezuela's refusal to fulfill its obligation under the note is an act committed outside the United States. Acts are in connection with such commercial activity so long as there is a substantive connection or a causal link between them and the commercial activity. See Hanil Bank v. PT. Bank Negara Indonesia, (Persero), 148 F.3d 127, 131 (2d Cir. 1998). Again, the court has no difficulty in finding that Venezuela's refusal to pay the note was substantively connected to Venezuela's guaranteeing said note.
3. Direct Effect
The court must now determine whether Venezuela's refusal to satisfy the note had a "direct effect" in the United States. The "direct effect" terminology was comprehensively addressed by the Supreme Court in Weltover. See 504 U.S. at 610-19. The bonds at issue in Weltover called for Argentina to make payments through the London, Frankfurt, Zurich, or New York market. When the bonds became mature, Argentina unilaterally extended the time for payment and offered the bondholders substitute instruments. The plaintiffs, two Panamanian corporations and a Swiss bank, rejected the substitution, specifying New York as the place where payment should be made. The plaintiffs brought suit and alleged jurisdiction under the FSIA's commercial activity exception. The plaintiffs argued that Argentina's refusal to pay had a "direct effect" because payment was supposed to have been made in New York. The Supreme Court agreed and noted: "Because New York was thus the place of performance for Argentina's ultimate contractual obligations, the rescheduling of those obligations necessarily had a "direct effect" in the United States: Money that was supposed to have been delivered to a New York bank for deposit was not forthcoming." Weltover, 504 U.S. at 619.
In the end, the Supreme Court rejected the notion that an effect could not be considered "direct" unless it was both "substantial" and "foreseeable." Instead, an effect is direct "if it follows as an immediate consequence of the defendant's activity." Weltover, 504 U.S. at 618 (internal citation, alteration, and quotation marks omitted).
Before Weltover, the circuits were split as to whether the "direct effect" must be both "substantial" and "foreseeable," as suggested by the legislative history of the FSIA.
With its decision in United World Trade, Inc. v. Mangyshlakneft Oil Prod. Ass'n, 33 F.3d 1232 (10th Cir. 1994), cert. denied, 513 U.S. 1112 (1995), the Tenth Circuit weighed in on the "direct effect" issue. In United World Trade, the plaintiff was a Colorado corporation engaged in an oil export venture with an entity granted authority by the Republic of Kazakhstan. The parties entered into several agreements by which the Kazakhstanian entity would supply oil to buyers found and coordinated by the plaintiff. The oil was to be transferred from Kazakhstan to Sicily, with payment by the plaintiff to be deposited in defendant's bank in Paris. According to the plaintiff, the defendant eventually breached its contract by refusing to supply further oil to the plaintiff and instead sold the oil directly to an arranged buyer. Plaintiff asserted jurisdiction under the FSIA's commercial activity exception.
The Tenth Circuit started its discussion by conceding that it had "struggled to identify objective standards that would aid in determining what does and does not qualify as a `direct effect' in the United States. The phrase itself seems hopelessly ambiguous when applied to any particular transaction." United World Trade, 33 F.3d at 1237. To help in its decision, the Tenth Circuit adopted the "legally significant acts" test enunciated by the Second Circuit in Weltover, Inc. v. Republic of Argentina, 941 F.2d 145, 152 (2d Cir. 1991), aff'd, 504 U.S. 607 (1992). Cf. Voest-Alpine Trading USA Corp. v. Bank of China, 142 F.3d 887, 894 (5th Cir. 1998) (rejecting the legally significant acts test).
In its decision affirming the Second Circuit, the Supreme Court did not specifically accept or reject the "legally significant acts" test.
In holding that the defendant in United World Trade was immune from suit, the Tenth Circuit distinguished the case from the facts presented in Weltover. See United World Trade, 33 F.3d at 1237. In particular, the court noted that unlike in Weltover, neither of the parties' performance was to take place in the United States, for the contract specifically identified Sicily and Paris as the places of performance. See id. at 1237-38. The plaintiff attempted to argue that because the contract required payment in United States dollars, a bank in the United States had to be involved. In rejecting this effect as merely tangential, the Tenth Circuit stated: "The requirement that an effect be `direct' indicates that Congress did not intend to provide jurisdiction whenever the ripples caused by an overseas transaction manage eventually to reach the shores of the United States." See id. at 1238.
The present plaintiff offers several reasons for why Venezuela's failure to meet its obligation under the note has had a "direct effect" in the United States. First, relying exclusively on Weltover, plaintiff asserts Venezuela's action had a "direct effect" in the United States because Venezuela was instructed by plaintiff to make payment to the escrow account in Topeka, Kansas. However, in line with Weltover and United World Trade, the court finds that nonpayment of a contractual obligation should only be deemed to have a "direct effect" in the United States if the payor was contractually obligated to present payment in the United States. The obligation to present payment in the United States may result from direct language in the contract or from a designation exercised in favor of the United States expressly granted by the contract. See, e.g., Weltover, 504 U.S. at 619 (finding "direct effect" where contract allowed for designation by payor and the United States designated as place of performance); Hanil Bank v. PT. Bank Negara Indonesia, (Persero), 148 F.3d 127, 132 (2d Cir. 1998) (same) ; Adler v. Federal Republic of Nigeria, 107 F.3d 720, 729 (9th Cir. 1997) (same); Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 241 (2d Cir. 1994) (finding "direct effect" where contract specified payment in the United States); Goodman Holdings v. Rafidain Bank, 26 F.3d 1143, 1146-47 (D.C. Cir. 1994) (finding no "direct effect" where contract did not specify the United States), cert. denied, 513 U.S. 1079 (1995) ; International Housing, Ltd. v. Rafidain Bank Iraq, 893 F.2d 8, 11-12 (2d Cir. 1989) (same); Dar El-Bina Eng'g Contracting Co. v. Republic of Iraq, 79 F. Supp.2d 374, 382 (S.D.N.Y. 2000) ("The synthesis of Weltover and its Second Circuit progeny therefore appears to be that nonpayment of a commercial obligation by a foreign state or its instrumentality has a direct effect in the United States if the defaulting party was contractually obligated to pay here.").
In accordance with the above analysis, it is evident the issue has now become, did Venezuela have a contractual obligation to pay plaintiff in the United States? As with any question of contractual interpretation, the court must first determine what law to apply. As a general rule, under the FSIA state substantive law controls. See First Nat'l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 622 n. 11 (1983). "In consequence, the FSIA requires courts to utilize the choice of law analysis of the forum state with respect to all issues governed by state substantive law." Dar El-Bina, 79 F. Supp.2d at 383 (citing Barkanic v. General Admin. of Civil Aviation of the People's Republic of China, 923 F.2d 957, 959 (2d Cir. 1991)). In this case, the court is presented with a promissory note executed in Venezuela, which contains a choice of law clause stating Swiss law should control the interpretation of the instrument. Fortunately, the court need not undertake a thorough conflicts of law analysis, for neither party has presented to the court the issue of applying foreign law in this matter. The Federal Rules of Civil Procedure provide:
The note contains the following clause: "The terms and conditions of this Promissory Note will be covered by and construed in accordance with the laws of Switzerland and in addition thereto by the regulations stipulated by the International Chamber of Commerce in Paris, France as Stated in Brochure "290" as last revised."
A party who intends to raise an issue concerning the law of a foreign country shall give notice by pleadings or other reasonable written notice. The court, in determining foreign law, may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence. The court's determination shall be treated as a ruling on a question of law.
This rule provides courts with broad authority to conduct their own research to determine foreign law but imposes no obligation upon them to do so. See Carey v. Bahama Cruise Lines, 864 F.2d 201, 205 (1st Cir. 1988). Considering that neither party has supplied the court with the particulars of any foreign law nor advocated its use, the court will not consider the applicability of any foreign law but instead apply forum law. See Luckett v. Bethlehem Steel Corp., 618 F.2d 1373, 1378 n. 3 (10th Cir. 1980) (considering the conflict issue waived and applying forum law).
The promissory note in question is silent as to where payment is to be tendered. The instrument neither establishes a place of payment or creates a means for designation by the bearer. Although plaintiff requested payment be made in Kansas, the court is unconvinced that Venezuela was obligated under the terms of the promissory note to present payment at plaintiff's requested location. Under the 1990 Revisions of the Uniform Commercial Code, if no place of payment is stated in a negotiable instrument, the instrument is generally payable at the address of the drawee or maker. See Kan. Stat. Ann. § 84-3-111 (adopting U.C.C. § 3-111). Unlike in Weltover, where Argentina was contractually bound by the plaintiffs' designation, Venezuela did not bind itself to make payment in any far-flung locale chosen by the fortuity of whatever entity may be in possession of the note. Because Venezuela was not contractually obligated to make payment in the United States, its failure to perform in the United States is not of "legal significance." Cf. Adler, 107 F.3d at 729 ("Nigeria was contractually obligated to make payment in New York. Its failure to perform there thus has "legal significance."). Without a legally significant act in the United States, the court finds Venezuela's nonpayment did not have a "direct effect" in the United States.
Plaintiff's second argument for why Venezuela's act created a "direct effect" in the United States is also lacking in merit. Plaintiff submits that registering the transfer of ownership of the promissory note to a United States corporation and later verifying such note as part of the nation's "external debt," are acts which had a "direct effect" in the United States. Registering or acknowledging that the note was held by an American entity is not a legally significant act as established in United World Trade. At best, plaintiff is asking the court to maintain jurisdiction because an American corporation suffered a financial loss at the hands of a foreign sovereign. As the Tenth Circuit noted in United World Trade, such a vast interpretation of the commercial activity exception is unsupported by the FSIA's language. See 33 F.3d at 1239.
Finally, plaintiff argues that because the note mandated payment in United States dollars, Venezuela's nonpayment had a "direct effect" in the United States. However, this "currency conversion" argument was succinctly rejected by the Tenth Circuit in United World Trade. See id. at 1237-38.
IV. CONCLUSION
In sum, the court rejects plaintiff's arguments that Venezuela's nonpayment of the promissory note in plaintiff's possession had a "direct effect" in the United States. Therefore, plaintiff has failed to present sufficient evidence demonstrating this matter falls within the purview of the commercial activity exception to the FSIA. This court lacks subject-matter jurisdiction over this action due to Venezuela's sovereign immunity. Without subject-matter jurisdiction, the court need not consider whether it has personal jurisdiction over defendants. Plaintiff's motion for default judgment will be denied. Because the court finds it lacks subject-matter jurisdiction, the court is compelled to dismiss the action. See Fed.R.Civ.P. 12(h)(3) ("Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action.").
Although the court declines to rule on the issue of personal jurisdiction, the court would recognize its hesitation concerning whether it has personal jurisdiction over defendants. It remains uncertain to what extent the "minimum contacts" test of International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) and its progeny is applicable under the FSIA. See Weltover, 504 U.S. at 619 (assuming without deciding that the test applies). Even if the test is inapplicable, considering the court's ruling regarding Venezuela's "direct effect" in the United States, the court would not, even assuming proper service of process, have personal jurisdiction over defendants.
IT IS THEREFORE BY THIS COURT ORDERED that plaintiff's Motion for Default Judgment is (Doc. 5) is denied.
IT IS FURTHER BY THIS COURT ORDERED that plaintiff's Complaint (Doc. 1) is dismissed, without prejudice, for lack of subject-matter jurisdiction.